Case Studies

According to the old saw, economists know the price of everything and the value of nothing. Since price and value are synonyms, the real point of the saying is that economists can price materials objects, but they can’t price feelings, like love.

As a dismal scientist, I have to object. We all can and do price love and other feelings on a routine basis. Unfortunately, we have to do this when it comes to making decisions like staying married or getting divorced that involve our emotions as well as our feelings.

“Consumption Smoothing” is a coinage only an economist could love. But like it or not, it's something we all do on a routine basis in our short-term economic lives. If we get paid once a month, we try to budget to spend the same amount each week. I.e, we try to maintain a stable living standard per household member.

Uncle Sam provides three tax breaks for clergy, which makes their planning more complicated than for laypeople. This case study points out the four major ways clergy are advantaged by special income-tax, Social Security-tax treatment, retirement account, and housing provisions. The study also indicates how to include each factor in ESPlanner.

In tough times like these, you need to know precisely the price you're paying for everything you buy. But knowing the true price of one of our largest purchases -- location -- is particularly tricky.

Will your living standard be 28 percent lower or only 5 percent lower if you move to Seattle with its cosmopolitan coffee houses, but rainy weather, rather than stay in Kansas City with its delicious Bar-B-Q, but scary tornadoes?

Question: "I'm 60 and have just retired. I have a pension that can pay me $760/mo. or a lump sum of about $120,000. I'm torn. Should I take the monthly payment format or the lump sum? It seems that I could take the lump sum and invest it elsewhere and do better job investing it. Right or wrong?" --Bill H., Birmingham, Ala.

Every day is tough: John manages the control tower at O’Hare International in Chicago. Prior to 2005, O’Hare laid claim to being the world’s busiest airport. (Today, Atlanta’s Hartsfield airport holds that title.) The stress is enormous. But it instantly vanishes when John’s pursues his passion—fly fishing on the Fox River, which is just down the road from his home.

Mary Hinojosa and her husband Miles Sigwell have two children to put through college--Franky, born in 2001, and Juliet, born in 2006. They would like to continue the family tradition of attending Caltech in Pasadena, California, so they must brace themselves for the annual $50,000 it will cost for each child in tuition, room, and board.

Mary and Miles have good incomes and still have some time to save. But after putting pencil to paper, they realize that this is not a simple calculation. Here's what they want to know:

Given that the $50,000 annual cost (measured in today's dollars) will arise in 2019-2022 and 2024-2027, how much do they need to save and when not only to meet this bill, but to have a stable living standard before and after they get the kids through college?

Selma Jones and her only child, Roger, aren’t crazy about each other, but they share a common desire – obtaining a higher living standard.

Roger’s 35 and makes $60,000 a year working for a landscaping company. Roger owns a large home that’s feeling pretty empty now that his girlfriend Thelma’s left. Roger hates to cook, clean, and do laundry. He spends lots of money eating out and having his place cleaned and his shirts pressed.

Bert and Ernie have been pals for a long time. They have the same $80K annual salary, and their employer, PBS, matches their $4K contribution to a 403(b).

They live across the street from each other on Sesame Lane and each owns his $200K Tudor-style home outright. They pay annual property taxes ($2K) and insurance ($700) on their home. Their homes are identical save for one feature: Bert gets the morning sun and Ernie gets the evening sun. Alas, their envy of each other is palpable.

Janet is a 55-year-old heart surgeon earning $250,000 a year, and she is burned out working every day. Her husband Jack is also 55, but he spends his days “birding” and has only a modest earnings history. Their 16-year-old son will head off to college to study ornithology in three years. Janet can’t take the work load much longer and plans to retire at age 60.

The $787 billion stimulus bill that President Barack Obama signed into law in February 2009 includes an $8,000 first-time home buyer tax credit. This is an expansion of a 2008 incentive that was essentially an interest-free loan.

Since 2010 everyone, regardless of income, is eligible to convert qualified retirement savings into a ROTH IRA. Doing so will require paying taxes on the amount converted; i.e., the amount taken out of the regular IRA and put into a ROTH IRA. We will see below that the value of the conversion can depend on where you live but also, even more significantly, when you intend to take Social Security.

All personal financial planning questions, from Can I retire early? to When should I take Social Security? to What can happen if I invest in risky assets? boil down to the impact on your living standard.

ESPlanner is the only financial planning program that directly calculates your living standard and helps you achieve the highest living standard that your current and future economic resources can support.

Take the example of Jack and Jill Sprat, a middle-aged couple.

Basic Profile:
Jack is 51, Jill is 49
Their children have already graduated from college.
Housing: 25 years remain on their $350,000 mortgage. They pay $2,000 per year in property tax, $1,500 per year in homeowners insurance, and make a $2,255 monthly mortgage payment. Their last payment is due in 2033.

Harold Smith, age 66, and Maude Smith, age 64, have been planning their retirement for a while. They did very well with their investments and both made a very good living. They saw the train-wreck coming in the housing market, and while they didn’t sell at the peak, they did ok when they sold their home in Nashville and moved into a rental in Havana, Florida (just outside Tallahasse).

John and Betty are very lucky. They are 30 years old; they just got married; and they have reliable jobs in today’s economy--earning $50,000 each. The couple has a 3 year-old and a 1 year-old. They plan to send their children to moderately expensive colleges and to retire at 65. They have a $12,500 in savings, plus $70,000 set aside for a down payment on a house.

For years the Social Security Administration urged retirees to take Social Security as soon as possible, even though doing so meant permanently receiving lower benefits. Here’s what they’ve said: “From an actuarial perspective, it doesn’t matter when you start collecting. But you may die early and regret (hopefully, in heaven) having waited, so don’t take the chance of dying before collecting. Take your benefits early.”

This advice and logic was as bad as it got. As far as we know no one has any regrets in heaven or needs any money.

Huck and Molly Finn from Hannibal, Missouri are both 30, earn $50K each, have a modest home, plan for one child in 2010, target to retire at 65, and expect to earn 3% real (after inflation) on their investments.

Their employers offer regular and Roth 401(k) retirement plans, but no match. Both plans can save taxes. Contributions to regular 401(k)s or IRAs are tax deductible, but withdrawals are taxable. Contributions to Roths aren’t deductible, but withdrawals are tax free.

Economics can’t say what’s fair, but it can help with divorce settlements by showing who’s really getting what and how to make the best out of a bad situation. Take Frank and Stacy Loveless. Frank’s 45, Stacy’s 38. He’s a dentist, she’s a dietician. They live in Saint Louis with their two kids, ages 7 and 3. The couple met in Frank’s dentist chair a decade ago. Stacy asked him out and, boy, what a wedding and what a great marriage until, well, things changed. Their main goal now is settling their affairs without declaring war.

Roth and regular retirement accounts provide significant opportunities for saving taxes over your lifetime. But deciding how much to invest in each and which to withdrawal first is tricky without the right software.

Jimmy and Rosalynn Carder are both 50, live in Planes, Georgia, and earn a combined $75,000. Thanks to the untimely death of Jimmy’s rich brother, Bilous, they also have $500,000 in financial assets. Jimmy and Rosalynn want to buy their dream house. It’s on the market for $437,500. But they don’t know whether to use their inheritance to buy it outright or use just 20 percent of their inheritance as a downpayment for a mortgage and save the rest. At the prevailing 7 percent rate for a fixed-rate, 30-year mortgage, they’ll pay $2,329 per month if they take out a mortgage.

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Disclaimer: ESPlanner and all other products provided by Economic Security Planning, Inc. (referred to hereafter as "we" or "our") are educational calculators designed to give you some input in mapping out your financial future, but should not be acted upon as a complete financial plan. MaxiFi Planner and the creators of MaxiFi Planner and any derivative products are not certified, registered, authorized, or any other type of financial planners. ESPlanner and its derivative products are simply tools for helping you think through your economic futures. Any suggestions should be viewed as informative inputs into your own decision-making with respect to saving and the purchase of life insurance. ESPlanner and its derivative products provide neither economic, financial nor tax advice, which can only be delivered to you by authorized professionals. The Social Security benefit estimates produced by ESPlanner are just that -- estimates. Only the Social Security Administration can tell you precisely the benefits to which you will be eligible or are eligible and the amounts you will receive. The estimates provided here may differ from the correct amounts due to mistakes in our computer code of which we are unaware or because of legislated changes in Social Security provisions of which we are unaware or because of delays in our updating our computer code for changes in Social Security provisions. This material is not intended to provide legal, tax or investment advice, or to avoid penalties that may be imposed under U.S. Federal tax laws, nor is it intended as a complete discussion of the tax and legal issues surrounding retirement investing. You should contact your tax advisor to learn more about the rules that may affect individual situations.